How to manage risks and grow family wealth

by Genevieve Cua, 19/10/2013

Since the 2008 financial crisis, wealth owners have come to associate risk with volatility. Yet, risk encompasses many more dimensions which will be critical to preserving wealth, says family wealth adviser and author Mark Daniell.

"One of the major mistakes that people make is thinking that risk is volatility. Volatility can be an advantage rather than negative. Risk is a 360 degree set of concerns, (such as) counterparty risk, concentration risk, tax, interest rates, family risks - a whole series of risks around family wealth that needs to be managed."

Mr Daniell, who lives in Singapore, was former managing director of Bain & Company (Asia). Between 2002 and 2003, he chaired the Singapore private wealth management initiative for the Economic Review Committee that looked into shaping Singapore into a major wealth management hub. The recommendations were accepted and many have come into fruition through the years.

Today his work is in the wealth management space. In 2010, for instance, he set up Raffles Family Wealth Trust to advice wealthy families on a wide range of issues. Mr Daniell runs his own Singapore-based family office and investment holding company called The Cuscaden Group.

He has also published as many as 10 books since the mid-2000, some of which have co-authors. A number of these books centre on issues surrounding family wealth and how it can be preserved for generations. This is an area, he says, where there is an information gap, particularly in Asia where wealth is being created at a prodigious pace.

"There are so many that are becoming wealthy in Asia; perhaps they sell a business or property, inherit money or are executives with high salaries. There are lots of books on family business, but almost none about what you do the morning after you wake up with a substantial amount of liquid family wealth."

Mr Daniell believes success in preserving family wealth generates "real social good". The oft-quoted proverb of rags to riches in three generations is no accident and appears to exist across cultures. The rate of attrition in Forbes' wealthy list is high. In his latest book, Family Wealth Management: 7 Imperatives for successful investing in the New World Order, he points out that none of the top 20 names in Forbes' rich list in 1918 remains on the list in 2012. The book is co-authored by Tom McCullough, founder and chief executive of the Northwood Family Office.

Recently, Credit Suisse Research Institute highlighted a similar finding in its 2013 wealth report - that just 66 per cent of the 2000-01 Forbes billionaires remain on the list in 2005. In 2010, the figure was 52 per cent.

In his book, Mr Daniell cites a number of reasons for the loss of wealth and stature. These include the impact of time and the large number of family members. Families tend to expand exponentially, but wealth grows only arithmetically. Other reasons are family disputes and marital discords; bad family values and practices; poor investment decisions; and "predators" in the family ecosystem, such as wrong advisers.

"It's not a zero sum game. If my family loses its wealth, it's not that another family gains wealth. It just goes away. Preserving family wealth allows families to do good things with their businesses, philanthropy, the individual lives in the communities where they live.

"Losing it has negative consequences for individuals and families, and lost opportunities for philanthropy and engagement with the community. So there is real importance in thinking about this issue, and quite surprisingly there wasn't a single reference book."

Managing crisis

Every family leader, he says, can expect a major challenge every 10 years to wealth and a smaller challenge every three to four years.

"One generation, which is about 30 years in today's world, faces at least three major challenges . . . There is a long series of risks people need to manage through. But at the same time there is an increasingly visible set of tools to help them manage through crises, to be one of the few families that can stay wealthy through generations."

In his advisory work for families, he says there is no one-size-fits-all solution. "Each family is unique. So it's not a question of telling people what to do, but providing a framework, a checklist of ideas to review and a disciplined process that people can go through to get where they want to be." The client base of Raffles Family Wealth Trust includes Asian families; so far none are Singaporean.

He says families generally face two challenges. One is the family dynamics around wealth. "Being able to engage and educate people about preserving wealth without spoiling children or creating tension or conflicts within the family; ensuring that family values are preserved, that the entrepreneurial spirit and culture that people want continue beyond their lifetime - that's a set of issues which leads to solutions such as governance and a family constitution."

The second issue is financial in nature, such as how to generate both capital growth and income. For families with a multi-generational view and horizon, investing through volatility can be a "real opportunity".

". . . They can buy advantageously at the right time and hold through crises . . . They can use that volatility and long-term perspective to their advantage, which is one of the unique things about family wealth - that you can invest for a superior return."

Asian families face some challenges that may be unique when seen against mature wealth in the West. These issues have to do with succession. "Many founding patriarchs of Asian businesses and wealthy families often stay actively involved in controlling the business until the end of their lives. There are different dynamics within Asian families . . ."

One of the challenges is clearly the generation gap which arises particularly when children are educated overseas and take on new approaches and values.

Asia, however, proffers a number of advantages such as closely knit families and a pro-business culture.

"Admiration of wealth still exists in most Asian cultures unlike in the US . . . One of the advantages of Asia is its growing environment. It's easier to grow and preserve wealth in a positive economic environment compared to the overly indebted, declining and trade union dominated western country."